The Two Sides of Crisis

Three years ago, the prevailing fear among economists was that individuals would lose their savings, insurance and pensions as a result of the banking crisis. The problem was solved through government intervention. The new crisis, however, is casting national governments as the ones in trouble.

The crises of 2008 and 2011 have two common denominators. The first is the panic in the stock markets. Investors are going berserk selling off their stocks, fearful of what is on the horizon. Stocks in Warsaw took a 15 percent nosedive, much like those in New York, London and Frankfurt. The second similarity is the cause of the crises: burgeoning debt.

The downfall of Lehman Brothers in September 2008 triggered the most serious financial crisis since the Great Depression. At the center of it all were banks, which were quickly bailed out or nationalized. At the time, the greatest fear about the economy was the insolvency of major financial institutions, which could bury ordinary citizens’ money under their ruins. Many countries, Poland included, raised guarantees for bank deposits [in response] to people panicking and withdrawing their savings. Today, no one is worried about bank deposits, as most banks emerged from the quagmire. Although many of them still remain under the authority of the state, they are coping.

This time around, it is sovereign national governments that are in danger of becoming insolvent, putting the interests of citizens in real danger. Pension payments might be halted, retirement benefits curtailed and health care rationed. Investment might grind to a halt, causing high unemployment and leading to a decline in the standard of living.

Significant differences can be seen in the approaches to battling these two crises. Three years ago, the central bank of the U.S. cut interest rates to zero to ensure a cheap currency and kick-start a recovery. The U.S. Fed and the Bank of England also began printing large amounts of currency. Today, the Fed is up against the wall, as it is impossible to lower interest rates any more. While the Fed can decide to keep printing more money, this is a risky move and might cause massive inflation. The number of viable ideas on combating the crisis is dwindling. The markets are nervously waiting for an agreement between the central banks and politicians that might help debtors regain credibility and pay off debts, and not kill the economy.

In 2008, the dollar was still seen as a viable reserve currency. Today, confidence in the dollar has vanished. The euro, widely seen in 2008 as a good contender for the reserve currency title, is facing problems of its own. The prudent are investing in the Swiss franc and gold.